Amend the RBI Act

The framework for the flow of annual surplus to the government should involve an amendment to the RBI Act so as to do away with the ambiguity that exists today

AuthorPublished: 23rd Jul 2019  12:00 amUpdated: 22nd Jul 2019  9:40 pm

There is a need to amend the RBI Act to remove the ambiguity on surplus flows to the government. The current provisions of the Act allow the central bank’s board to decide how much it wants to tuck away as its contingency fund or other reserves and what proportion of reserves it wants to transfer to the government. As a consequence, it has built up reserves higher than what most other central banks hold. This has been a bone of contention between the NDA government and the central bank. The government believes that the RBI is being too conservative and is sitting on huge reserves and part of it should be transferred for more productive use. The Bimal Jalan Committee, set up to review the economic capital framework of the RBI, has recommended the transfer of excess capital from the central bank to the government in a staggered manner over 3 to 5 years. The internal estimates of the Finance Ministry put the RBI’s excess reserves at Rs 3.6 lakh crore. According to Section 47 of the RBI Act, profits of the RBI are to be transferred to the government after making various contingency provisions, public policy mandate of the RBI, including financial stability considerations. For the year ending June 2018, it had total reserves of Rs 9.59 lakh crore, comprising mainly currency and gold revaluation account and contingency fund. Economists and expert committees have in the past argued that the RBI is holding much higher capital required to cover all its risks and contingencies.

At 28%, the RBI is one of the largest holders of capital and retained earnings among the emerging economies. However, it must be pointed out that this surplus capital has not been stashed away somewhere or denied to the economy. In fact, all this excess capital lying on the RBI’s books has been used to lend money to the government by way of government bonds. Former Chief Economic Adviser Arvind Subramanian said, in the Economic Survey of 2016-17, that the RBI is already exceptionally highly capitalised and nearly Rs 4 lakh crore of its capital transfer to the government can be used for recapitalising the banks. However, this proposal was opposed by then RBI Governor Raghuram Rajan. The framework for the flow of annual surplus to the government should involve an amendment to the RBI Act so as to do away with the ambiguity that exists today — the Act allows the RBI board to decide how much it wants to keep as its contingency fund or other reserves. A provision for a realistic level of revaluation reserves should be made. A system for sharing the surpluses with the Centre must be institutionalised by amending the RBI Act.